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A MESSAGE FROM CASTLE PRESIDENT KEN JENKINS

Dear Castle Member,

On February 3rd, 2016, the industry received news of the acquisition of Rona by Lowe’s. I would like to share my perspective on the acquisition announcement and what the impact will be on our industry.

It is important to understand the motivation by both parties and what they seek to gain through acquisition. The complexities of a southern US based company philosophy integrating into a Quebec based business culture will be significant. The statements being made by Rona and Lowe’s reflect a holistic view on what they believe will be a win / win for everyone involved.

However, the reality being faced by Rona is a company struggling to deliver value to their public shareholder investors. In 2012, Lowe’s made an initial attempt to acquire Rona with a $1.8B offer. The acquisition attempt was met with tremendous opposition from the Rona Board of Directors and the political powers in Quebec at that time. While the acquisition attempt was not successful, it did initiate a significant change within the composition of the Rona Board of Directors and led to a change of leadership. Rona announced the departure of President, Robert Dutton and replaced him with Robert Sawyer.

Immediately upon his appointment, Sawyer announced a number of cost cutting initiatives throughout Rona as the company sought to improve its’ profitability. Keep in mind, Sawyer was focused on one objective; improve the share value of Rona. It is the core mandate of any publicly traded corporation. While the cost cutting objectives were accomplished, Rona’s largest challenge over the past decade was growing the top line. As an Independent entrepreneur, you know you can only cut cost to a certain point before it creates a negative impact on your business. Rona’s inability to grow the overall value of the company was exhibited in the continual erosion of their share price over the last three years.

While Rona was closing underperforming corporate stores and fixated on cutting costs, Lowe’s has slowly continued to develop their big box format in Canada. Over the past seven years, Lowe’s has developed ten box locations in western Canada and thirty two in Ontario. While the growth of Lowe’s locations continues, they are significantly behind the dominant player in the big box arena, Home Depot, which represents 187 locations across the country. During the past seven years of growth, Lowe’s has failed to be profitable in their Canadian operations. This is underscored by the continuous change within their executive leadership in Canada as they struggle to penetrate the market.

When you combine the challenges being experienced by Rona and the slow growth of Lowe’s in the Canadian market, the synergies for an acquisition begin to make sense. In addition, the currency exchange rate that currently exists provides Lowe’s with a significant discount based on the strength of the US dollar.

Positioning for the acquisition appears to have started in the third quarter of 2015 when Rona announced they would acquire full ownership of twenty large Independent members (primarily in Quebec). These were Independent dealers which Rona held investment in for many years. While many at that time questioned the rationale of Rona in acquiring full ownership, it is apparent now the reason was to ensure these Independent owners did not complicate the acquisition opportunity being sought by Lowe’s.

Upon announcement of the acquisition attempt on February 3rd, statements regarding the positive impact it will create for both parties were released. Lowe’s has carefully articulated they will protect the multiple brands of Rona, relocate their Canadian head office to Quebec, preserve jobs within the organization and maintain the key executive of Rona. Having learned from the negative backlash of their last acquisition attempt, Lowe’s has carefully tried to avoid the “political fallout” associated with an American company purchasing a Quebec based business. They also need to appease any issues relative to the regulatory review that will occur through the Canadian Competition Bureau.

In my opinion, regardless of the positioning statements being made by both companies, the real motivation is the desire for Lowe’s to become a true national competitor to Home Depot. The strategy of Lowe’s in their slow evolution into Canada would require another decade to achieve critical mass. The acquisition provides immediate access to key real estate holdings and a potential market share in the Quebec region where Home Depot has been historically weak. While the big box model in Canada only represents approximately 20% of the home improvement and renovation industry, Home Depot’s position in the segment has strengthened due to the ineffective strategies of Rona and Lowe’s.

So as we read and listen to how the acquisition will benefit all involved, including the Independent members of Rona, a new reality will begin to unfold post acquisition. The first step will be the integration of the two models which many in the industry expect to take years and be tremendously complex. Throughout the transition, we believe Castle is well positioned to grow through new member opportunities. Of the 260 Independent dealers that Rona claims to represent, many have expressed dissatisfaction over the years. Castle has added a number of past Rona members who have provided tremendous value to our group.

While Lowe’s states they will support the Independent members of Rona, the reality of a publicly traded, big box centric, US company with no experience in distributing to an Independent network seems idealistic. Again, saying the right things through the acquisition of Rona is important for Lowe’s in order to avoid further public scrutiny. However, for an Independent member of Rona to believe they will move from a Canadian based publicly traded company to a US based publicly traded company and receive priority attention is unrealistic.

The comments made by Sylvain Prud`homme, President of Lowe’s Canada, are indicative of what is to come. “The merger is expected to add $1-billion to the bottom line of Lowe’s”. In reality, Rona does not possess $1B of cash on their balance sheet. His statement will be achieved through the merging and elimination of redundancies primarily at the expense of the Rona culture. It’s the first step in every large acquisition. The expense of supporting multiple banners is unrealistic.

The other dynamic that will ensue is the disruption within the manufacturing and distribution supplier network in Canada. As the acquisition occurs, many suppliers stand to gain or lose significant opportunity as the channel to market reduces across the country. The turmoil within the Rona / Lowe’s supplier network has already begun as fear of the change approaches. Throughout this process, Castle stands to gain opportunity as our volume becomes more important to the supplier network. Our ability to achieve significant growth over the past five years has resonated well with our suppliers. The changes that will occur as a result of the Lowe’s acquisition will continue to strengthen our supply channel opportunities.

In closing, I believe the acquisition will complete. Rona is attempting to have their shareholder vote related to the Lowe’s offer completed by April 8th. In addition to the shareholder vote, the process will require Canadian Competition Bureau approval and compliance with the Investment Canada Act which governs foreign ownership within Canadian corporations. The timing for completion of the acquisition is slated for early in the second half of 2016.

Many have speculated as to why Lowe’s has come back with such a lucrative offer (104% of the Rona share value as of February 2nd, 2016). Simply, Lowe’s is struggling to penetrate the Canadian market, Rona is unable to grow its platform and create additional shareholder wealth and the discount for American companies seeking to expand in Canada is being fuelled by the currency imbalance. However, overriding all of these dynamics is Lowe’s core motivation; to be a true competitor to Home Depot in the Big Box category across North America.

There is a saying, “price overcomes all objections”. At an offer of $24.00 per common share, Lowe’s is attempting to take all objections off the table. I will endeavour to keep the members of Castle apprised of the transition as it takes place throughout the year. We believe this will provide additional growth opportunities for your group as Castle continues to solidify our support of Independent entrepreneurs across the country.

If you have questions or if I can be of service in any way, please do not hesitate to contact me at any time. My email address is kjenkins@castle.ca and my cell phone number is 647-227-3307.

Personal Regards,

Ken Jenkins

About Castle Building Centres Group

Castle Building Centres Group Ltd. is a Canadian member-owned, Lumber, Building Materials and Hardware buying group committed to the success of the independent.

Our commitment is to drive this success to over 300 Castle member locations and is achieved through unwavering Transparency, Freedom and Profitability.

Our business model focuses on accountability to our membership, member freedom of choice, and a commitment to their success, growth and profitability through strategic partnerships with key vendor partners and a winning hardware distribution solution.